Gratuity: New Limit, Eligibility, Formula, Taxation, and Calculator

In 1972 Gratuity Formula, the parliament passed a bill for payment of gratuity. As per the law, Gratuity is given to an employee of a government or private sector company by his employer. The gift is nothing but a bonus given to the employee for being loyal to the company and staying for a more extended period. Gratuity is paid to an employee at the time of his retirement if he has successfully fulfilled more than five years or before departure in case of death or severe bodily injury.

As per the law, when an employee renders service with their employer uninterruptedly for five years, he is eligible for the gratuity. But their service can be interrupted on account of the sickness of the employee, on account of an accident, leave, layoff, strike, lockout, cessation due to an employee’s fault or absence from duty without pre-approved or informed leave.

Gratuity Formula

Gratuity Formula

New Limit

Earlier when the bill passed, the gratuity limit was ten lakhs. But recently parliament of India exceeded the limit to 20 Lakhs. This new gratuity limit is applicable for both private as well as government sectors. An employer can choose to pay the employee anywhere between 10 Lakhs to 20 Lakhs. But gratuity amount more than 20 Lakhs is taxable as per the bill.

This limit of 20 Lakhs applied to an integrated amount that received from one or more employer in the same or different years.

This new ceiling of 20 Lakhs for gratuity was effective from 29th March 2018.

Eligibility

For the company to be eligible to give a gratuity to their employee, their workforce strength must be more than ten counts. It is important to note here the company hits the mark of 10 employees, then they are eligible to offer gratuity. It doesn’t matter then if the workforce reduces, the company will still be able to provide a bonus to loyal employees.

For the employee to be eligible for the same, he must have rendered his services to the company for at least five years. Contract workers and temporary staff also covered under this bonus, and they are also eligible to claim the bonus if they have worked with the company for more than five years. Employees that have transferred to different cities or countries are also available for the gift. However, apprentices are not eligible for gratuity. The probation period can also count in the five years of experience.

Gratuity is paid to the employee by their employer at the time of:

  • Retirement
  • Resignation & Termination
  • On death or disablement due to an accident or a disease
  • On Retrenchment Layoff
  • VRS

How is Gratuity calculated

For an employee who works below the ground (like mining), the year in which the employee has worked for more than 190 days, is considered as one year.

For the employee who works above the ground, the year in which the employee works for more than 240 working days counted as one whole year.

Hence, if the employee has worked for days less than specified above, such days are not counted towards gratuity.

For example, if an employee has worked with a company for four years and eight months, the duration is considered as five years, but if he has worked in the company for four years four months the term is not calculated as five whole years, and the employee will not be eligible for gratuity.

Formula

The formula for calculating gratuity is as below:

Gratuity = Last drawn salary *fifteen/twenty-six* No of completed years of service.

You can also use the Gratuity Calculator to calculate the gratuity amount.

Taxation

Gratuity amount received by the employee during his years of working with the same company is taxable. However, if the employee has received the gratuity upon retirement, death, or superannuation.

Tax benefits for that of an employee working with a private sector company are different than those of working in the public or government sector.

  • Tax benefits for Government Employees

For public sector or government officers, defense officers or employees in local authority any Gratuity received during death or retirement is entirely tax-free

  • Tax Benefits for Private Sector employees

For private sector employees, under the payment of gratuity act 1972 exemption is offer up to:

  • Rs 20 Lakhs
    • Actual gratuity received

Calculator

Generally, salary consists of multiple components like Basic, DA, HRA, Bonus, Commission, Allowancesfiveand Perquisites. Before calculating the gift, one needs to be aware of the definition of salary, which defined in the gratuity bill. As per the statement for gratuity, coverage salary includes Basic salary and Dearness Allowance. While the government has so much to offer the employees when they retire, it is essential for one as an individual to make smart investments so that they can spend later years of their lives without any worry. You can consider investing in FD using the funds accumulated through gratuity as they are a safe and secure option. With NBFCs like Bajaj Finance, you can even get a higher interest rate than most banks and many other attractive benefits.

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